SESSION 12: MANUFACTURING ACCOUNTS PRODUCTION COST STATEMENTS / BREAK-EVEN ANALYSIS CALCULATION KEY CONCEPTS: In this session we will look at: - Manufacturing Accounts X-AMPLE QUESTIONS: QUESTION 1: You are provided with information (balances, transactions and adjustments) relating to Fatima Manufacturers owned by Fatima Fala. The business manufactures shoes. REQUIRED 1.1 Calculate the value of the raw materials that were issued to the factory for the year ended 28 February 2010. (You may prepare the Raw Materials Stock Account to assist with your calculation.) (7) 1.2 Prepare the following notes to the Production Cost Statement for the year ended 28 February 2010: 1.3 Direct labour cost Factory overhead cost Prepare the Production Cost Statement for the year ended 28 February 2010. (16) (10) 1.4 You are provided with unit costs and the break-even point calculated for the past two years. 2010 2009 Raw materials cost per unit R48,30 R54,30 Direct labour cost per unit R37,38 R51,70 Factory overhead cost per unit R34,32 R30,25 Break-even point 19 548 units 11 300 units Number of units produced 20 000 units 24 000 units (a) (b) Explain whether Fatima should be concerned about the break-even point for 2010. Quote figures to support your answer. (3) Give a possible reason, other than price changes, for the change in EACH of the unit costs provided above. (6) Brought to you by Page 1
INFORMATION 1. OPENING BALANCES ON 1 MARCH 2009 Raw materials stock R 160 000 Work-in-process stock 158 000 Finished goods stock 120 000 Consumable stores stock: Factory 6 000 Factory plant and equipment at cost 2 225 000 Accumulated depreciation on factory plant and equipment 450 000 2 SUMMARY OF TRANSACTIONS FOR THE YEAR ENDED 28 FEBRUARY 2010 Purchases of raw materials on credit R1 023 475 Carriage on purchases of raw materials 22 500 Consumable stores purchased for the factory 43 000 Cleaning materials purchased for the office 12 000 Factory plant and equipment purchased on 1 September 2009 250 000 Production wages 723 800 UIF Contribution for factory employees? Salaries: Factory foreman 150 000 Administration 400 000 Sales staff 250 000 Water and electricity 163 000 Sundry expenses: Factory 194 680 Administration 530 000 Sales department 340 000 3. CLOSING BALANCES ON 28 FEBRUARY 2010 Raw materials stock R259 125 Work-in-process stock? Finished goods stock 142 500 Consumable stores stock: Factory 7 000 4. ADDITIONAL INFORMATION AND ADJUSTMENTS A. No entry was made for the transport of raw materials by Pops Carriers to the factory, R3 750. B. During the physical stocktaking of raw materials on 28 February 2010, a calculation error was made. 6 000 articles at 15c each were taken into account at 50c each on the stock lists. This must be corrected. C. No entry was made for the following in respect of the production wages for the last week of February 2010. The entry was omitted from the Wages Journal: Brought to you by Page 2
Gross wages R6 200 Deductions: Unemployment Insurance Fund 62 PAYE 1 240 D. An amount of R4 200 was still outstanding on the Water and Electricity Account for February 2010. Sixty per cent (60%) of all the water and electricity was used in the factory. E. Depreciation on factory plant and equipment must be brought into account at 10% per annum, according to the diminishing balance method. F. During the year 20 000 pairs of shoes were manufactured. G. The shoes are sold at a mark-up of 65% on cost. H. The shoes are sold at R198 per pair. [55] X-ERCISE QUESTIONS QUESTION 1: MANUFACTURING The information below was extracted from the financial records of Valley Manufacturers which is owned by Java. The business manufactures one style of raincoat. The financial year ends on 28 February 2010. REQUIRED 1.1 Indicate whether the following statements are TRUE or FALSE. Choose the answer and write only 'true' or 'false' next to the question numbers (1.1.1 1.1.5). 1.1.1 Fixed costs remain unchanged in relation to the number of units produced within a period of time. 1.1.2 The salary of the factory foreman will be regarded as a directlabour cost. 1.1.3 Factory rent will be regarded as a variable cost. 1.1.4 Prime cost is calculated by adding direct-material cost and direct-labour cost. 1.1.5 Advertising will be classified as an administration cost. 1.2 Refer to Information B. Calculate the following: 1.2.1 1.2.2 1.3 Refer to Information C. The value of raw materials on hand on 28 February 2010 using the FIFO method The value of raw material cost that would appear in the Production Cost Statement (4) Calculate the value of direct-labour cost that would appear in the Production Cost Statement for the year ended 28 February 2010. (7) 1.4 The business produced 4 000 raincoats during the year. There was no work-in-process at the beginning or at the end of the year. Factory overhead costs amounted to R67,55 per unit. Calculate the following: Brought to you by Page 3
1.4.1 1.4.2 The total production cost of finished goods The unit cost of production (per raincoat) (3) 1.5 Java asks you to further investigate the control over raw materials. 1.5.1 Identify the number of metres of raw material fabric that appear to be missing. 1.5.2 Apart from theft, give ONE most likely reason for this shortage. What advice could you offer Java in this regard? Name ONE point. 1.6 Break-even point: 1.6.1 Calculate the break-even point for the current financial year. 1.6.2 The break-even point for 2009 was 2 273 units. Should Java be satisfied or dissatisfied with the break-even point for 2010 calculated in QUESTION 1.6.1? Briefly explain. (4) (4) (3) INFORMATION A. Production: Number of raincoats produced last year Number of raincoats produced this year 4 500 units 4 000 units B. Raw materials: 1. Usage Java has done a study of the manufacturing process and has found that it should take 1,8 metres of fabric to make one raincoat. 2. Stocks of raw material on hand were: Number of metres of fabric Cost per metre Opening stock 700 metres R30 Raw materials issued to the factory for the production of raincoats 9 100 metres? Closing stock 4 300 metres? 3. Purchases of raw materials during the year were as follows: Number of Cost per metres of fabric metre Total cost Purchases 12 700 metres R490 600 April 2009 7 000 metres R34 R238 000 November 2009 3 500 metres R42 R147 000 February 2010 2 200 metres R48 R105 600 C. Employees: 1. Java employs the following individuals: Details Number of Basic Total cost of Overtime Brought to you by Page 4
Employees in the production process Factory foreman employees monthly salary/wage per employee employment including benefits 5 R5 000? 1 R8 000 R112 000 Hours 180 hours (each worker) Rate R70 - - Salesman 1 R4 000? - - 2. Employment benefits and overtime Employment benefits are allocated to the cost account applicable to the salaries/wages of the specific employees. All employees are registered with the business' pension fund and the UIF. Deductions are made from the basic salary for the pension fund (8%) and the UIF (1%). The employer contributes 10% towards the pension fund and 1% to the UIF. Overtime and commissions are not subject to pension fund and UIF deductions or contributions. The five workers who make the raincoats each worked 180 hours of overtime during the year at a rate of R70 per hour. D. Stocks of finished goods on hand were: Number of raincoats Value per unit Opening stock 110 R284 Closing stock 420 R246 E. Analysis of total costs and unit costs: 2010 2010 2009 Total Per unit Per unit R1 400 R350 Selling price 000 R350 Variable costs: R863 800 R215,95 R184,60 Direct-material cost?? R63,30 Direct-labour cost?? R82,20 Selling and distribution cost R150 000 R37,50 R39,10 Fixed costs: R350 200 R87,55 R83,54 Factory overhead cost? R67,55 R58,04 Administration cost R80 000 R20,00 R25,50 [50] Brought to you by Page 5
SOLUTIONS TO X-ERCISE QUESTIONS QUESTION 1: 1.1 1.1.1 True 1.1.2 False 1.1.3 False 1.1.4 True 1.1.5 False (10) 1.2.1 105 600 + (2 100 x R42 ) = 193 800 1.2.2 21 000 + 490 600 193 800 = 317 800 (4) 1.3 Normal time = 5 x 5 000 x 12 = R300 000 Overtime = 180 x 70 x 5 = R63 000 UIF + Pension = 300 000 x 11% R33 000 R 396 000 (7) 1.4.1 317 800 +396 000 + (67,55 x 4 000 ) = R984 000 1.4.2 R984 000 / 4 000 = R246 (3) 1.5.1 9 100 (1,8 X 4 000 ) = 1 900 metres 1.5.2 Valid reason Possible reasons: Wastage during production Unskilled employees Unusable materials/off-cuts What advice could you offer Java in this regard? Name ONE point. Advice Better supervision during production Control over allocation of raw materials Training of employees Use good quality material (4) 1.6.1 Fixed costs SP per unit Variable costs per unit 350 200 350 215,95 350 200 134,05 2 612,45 2 613 units (4) Brought to you by Page 6
1.6.2 Java should be satisfied. The business has produced 4 000 units while break even is 2 613 units. OR Dissatisfied the break even of 2 613 units is higher than 2 273 in 2009. (3) [50] Brought to you by Page 7